DEFENCE contractor BAE Systems said today it expected the performance of its key programmes business to be "restrained" in 2004 as it unveiled a 4.5 per cent fall in pre-tax profits to £760m.

The group said programmes, which comprises its main air and sea systems activities, would increase its sales in the coming year.

But it said the contribution from the division would continue to be restrained until negotiations on the next phase of development of its Eurofighter Typhoon weapons system and the further tranches of production aircraft are concluded.

The aircraft, which is being developed for air forces in the UK, Germany, Italy and Spain, is now in production with deliveries under way.

But Eurofighter and the group's other big defence programmes - Nimrod aircraft upgrades and Astute submarines - are facing uncertainty due to Ministry of Defence budget cuts.

Some of the work on the Nimrod contract is being undertaken at Woodford near Stockport, while the firm's giant factory near Preston is a major hub of the Eurofighter programme.

Analysts are widely expecting the Government to cut the 88 Eurofighters it plans to buy in the third tranche, which consists of a total of 236 jets.

The company said today it was continuing to negotiate with governments for that number of aircraft.

The group gave little clue about progress in appointing a new chairman to replace Sir Richard Evans, who is to step down in May. It said it remained focused on appointing a replacement by th e annual meeting in May.

BAE Systems designs and manufactures civil and military aircraft, surface ships, submarines and a range of defence products.

The group, based in Farnborough, Hampshire, employs more than 90,000 people in 130 countries and generates annual sales of about £12bn.

BAE said today that it turned in a better than expected cash performance during the year to December 31, with a record order book standing at £46bn.

Chief executive Mike Turner said: "Our overall priorities are to deliver enhanced performance and improve returns, particularly from our major UK defence programmes in the medium term and to continue to grow our US business."